Barings Bank, one of the oldest names in the City of London, collapsed because nobody in the bank’s hierarchy had the knowledge or the inclination to challenge the trader whose unauthorised deals brought the bank down.

Nick was the star of Barings’ Singapore operation in the early 1990s. His role involved making trades on behalf of clients, on the Singapore International Monetary Exchange, but he was soon trading on the bank’s own account, making substantial profits that at one stage amounted to a tenth of Barings’ global earnings.

The biggest mistake at Barings was the level of challenge; I was never challenged personally. People were not joining the dots.

The inevitable losses were concealed in a special account, “88888”, which had originally been set up to cover an error by another colleague. In 1995, after the Kobe earthquake caused a slump in the Japanese stock market, Barings’ liabilities amounted to $1.3bn: a sum greater than the bank’s entire capital. It was the end for Barings and for Leeson, who fled Singapore but was eventually extradited and convicted, serving six and a half years in prison.

The story was later told in the film Rogue Trader, starring Ewan McGregor and Anna Friel.

Nick, who now lives in Ireland and gives talks to the financial sector on how to avoid the fate of Barings, says: “The biggest mistake at Barings was the level of challenge; I was never challenged personally. People were not joining the dots.

“It’s about systems and controls, and sometimes it’s about a lack of understanding about the bank and how it works.”

He gives as an example, the fact that the Singapore operation was meant to be trading only on behalf of clients, yet he was asking the chiefs in London for a cash margin for his trades. That would only have made sense if Nick had been authorised to take market positions on the bank’s own behalf, but nobody questioned it until too late.

He notes: “I was able to give two different answers to the risk manager and the compliance manager. If they had put the two versions together, they could have seen that something was wrong.”

Lessons to be learned

So was Barings unique in its poor controls, or are other financial institutions still vulnerable to the actions of a rogue trader? In recent years we have seen traders Jerome Kerviel (Societe General), Kweku Adoboli (UBS) and “London Whale” Bruno Ikril (JP Morgan Chase) involved in similar scandals, albeit without taking their employers all the way over the brink.

Nick says: “Barings Bank was a very old bank and very blue-blooded. But Barings Securities was a relatively new creation, only formed in 1985. It was all about speed, getting in before anyone else and making as much money as they could.

“Barings was an anomaly even at the time, with poor systems, poor controls and poor people in charge. There has been a sea change in banking but there is still a long way to go… even now, only a minority of banks would punish a trader who trades outside his limits, as long as he is making money.”

He adds: “If you do not enforce a rule then it does not act as a deterrent. What slowly develops is that you realise that the people in charge aren’t very good, so you end up developing complete and utter contempt for them.

“As a trader, you know from day one what the rules are. What is not so apparent is whether they are enforced as well as they should be.”

The Devil is in the detail

So does Nick now have any advice for those tasked with ensuring compliance in financial institutions today?

He says: “It is very important to make sure that you know exactly how the component parts of the business fit together. A bank evolves at a rapid pace, so compliance has to evolve at the same pace.”

As an example, Nick recalls: “The auditors at Barings were auditing the trade tickets on the ‘88888’ account. The tickets had no stamp, which should have raised questions, but nobody asked what the 88888 account was for. People were just ticking boxes.”

Nick Leeson speaks regularly at conferences and dinners around the world on risk management, compliance, corporate responsibility and governance. He is also a popular after dinner speaker, where he talks about the collapse of Barings Bank and being imprisoned in Singapore. For more information see www.nickleeson.com

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